BTC edged above the 50k level yesterday in Asia morning, a key level that BTC has not closed above since the crash on 12 May.
The catalyst for the break higher was the same pattern of option flow that has been consistently pushing prices higher in the last few weeks. Around 7am in Asia, the market was hit for a large amount of call options rapidly in multiple clips, ‘drive by’ style (Chart 1).
We’ve been bullish towards the 50k price level in BTC but were unsure after. We now maintain our bullish bias against the 40k support level in BTC. These are our reasons:
1. Possibility of Fed taper risk pushed from September to December.
a. The Fed’s Jackson Hole Symposium held on Thursday and Friday this week has been turned into a virtual summit. We are doubtful that the Fed would signal a taper at this event.
b. Governor Brainard’s latest dovish pivot to become Fed chair is likely to raise enough questions within the FOMC to delay their decision by a quarter (to December).
With that said, we will be watching the US CPI (14 Sep) and FOMC (23 Sep) events very closely.
2. Headline regulatory risk exhausted in the near-term. We expect any significant crypto-related regulatory decisions to come only towards Q1 2022, particularly anything from the Senate Banking Committee & the SEC.
3. Rally driven by real demand.. Sharp rallies in crypto are usually accompanied by a spike in funding rates (in perpetual swaps) and stark contango (premium in the futures) due to frenzied deployment of leverage by speculators. This is not sustainable and typically precede severe corrections like the dip we saw in Q1 2021 (Chart 2).
In spite of today’s mini funding spike on the rally (up to 20% annualized), funding rates and future premiums in both BTC and ETH actually continue to be relatively low and muted. This means most of the rally has been driven by demand in physical spot rather than from leveraged speculators. In spite of the sharp rally, the market does not show signs of overheating or overextension. Not yet at least.
However, our bullishness comes with some moderation and we don’t expect more exponential upside breaks like what we saw at the end of 2020 into 2021. These are our reasons:
- No signs of stress in vols. We continued to see significant call buying in the past week (Chart 3). However, the vol market has absorbed this surprisingly well with implied vol continuing its decline, especially in the long-end of the curve (Chart 4).
We, along with other vol market makers, have been happy to sell decent amounts of vega into this rally. The calmness in vols is not consistent with crazy breakout behaviour.
2. No signs of stress in spot or forwards. In spite of the break of 50k, the market does not look like it’s caught short. It is usually short covering that causes rapid upside breaks. The failure to close the day above 50k also shows some weakness in demand. At the same time, the forward curve remains flat (Chart 4).
3. GBTC continues to trade at a large discount to spot: -12% (Chart 5). The bull run from last year happened while GBTC was trading with a strong premium over spot. As a proxy for US interest, GBTC should at least trade at par if we are to expect any strong follow through in spot.
Overall, we are constructive on BTC and ETH price but we expect some consolidation here (Chart 6). 51,110 BTCUSD is the 61.8% retracement from the ATH to June’s 28,800 low — we expect good resistance at this level. A consolidation triangle in the RSI also reflects the hesitancy in the market despite the positive price action.
The clear trade for us here is short vols as we expect spot to be sticky around the 48–51k level. This would see further vol compression across the curve.More specifically, we are short both Vega and Gamma here.
Implieds are still relatively elevated from the spike the week before so there are great premiums to be extracted while spot trades in this tight range.